4 Key Steps to Choosing the Right Bank for Your Small Business
In 2017 many small business owners see a bank as a financial means to an end and that number is growing. Banks are a dime a dozen, right? They all offer the same products; business loans, lines of credit and a place to park your hard earned money. If all banks offer the same products and services, why does it matter which bank you partner with? The truth is all banks are not the same and all banks are not created equal. Every bank has a different appetite for business industry type, which projects are worthy of a loan and how much risk they are willing to take in their portfolio. Choosing the wrong bank could cost your time and money. In this post I will discuss 4 key steps for choosing the right banking relationship.
1. Determine what basic banking needs you may have now and in the future.
Many people make their first mistake by going to the closest banking location and opening a checking account without much thought of what their business banking needs are. Your first step should be to examine your business and determine what your current and future needs are. Will there be a need for working capital to finance a delay in receiving payment after completing a service? If so, you may need a credit card or line of credit. Will your need to purchase new or used equipment? Do you want to own your location some day? Make sure the bank you choose can provide all of the services you need today and the near future.
2. Determine if your industry is on the cautioned or preferred list.
Just about every bank will accept you as a customer if you only want to deposit money, but what about if you want to borrow? Your second step in determining which bank is right for you should be to know if your industry is preferred or on the cautioned list. Getting the answer to this question usually happens when you find out you have been declined or persuaded not to apply for a loan; that is too late. Make sure to ask to speak to a loan officer at the bank and provide a few scenarios of loans you may need in the future and take note of what is required from you as a borrower prior to becoming a customer. Determine what the conditions and restrictions are to borrow, as they may affect your ability to successfully grow your business.
3. Make sure the banker understands your business.
Once you have determined that the bank is on your short list of companies that may be a good fit, it is time to interview the business banker. How much knowledge does the banker have on your specific industry? If little or none, you will need to spend time educating the banker. Your banker doesn't need to know the intricate details of how your business runs, but your banker will need to know the general overview. This is important because most times your banker is not making the final decision on your current or future loan requests. That person will be the underwriter. The depth of knowledge the banker has about your business and his ability to relay that information can be the deciding factor in getting your loan approved without jumping though several hoops. Your third step is to make sure the banker understands your business and if not, how willing is the banker to learn?
4. Determine how much it will cost to do your banking.
Once you have successfully completed steps 1 through 3 your final step should be determining how much it will cost for you to do your banking. The cost of doing banking has two parts. The first is how much will you be charged to move money in and out of a deposit account? The second and often larger expense is how much will it cost you to borrow money? Often the cost to borrow is directly tied to how much risk the bank is willing to take. A bank that is fairly easy to get approved for a loan will often have a higher interest rate for credit products as opposed to a bank with stricter criteria having lower interest rates. If your business is on the cautioned list you may find the terms, conditions and the rates less pleasing than if you were a preferred customer. Make sure your perceived level of risk matches with the terms you are offered. As your business grows and becomes more established and sought after you may look to move your banking relationship to bank that is more in line with your level of status.
Hopefully this helps you make an educated decision when choosing your banking partner. If done right, you will find a bank and banker that can meet all of your long term needs. Also don't be afraid to switch banking partners if everything lines up to be the right fit somewhere else. Good luck out there and as always be Selden Smart.